The focus of early-stage offshore wind energy development along the eastern seaboard of the U.S. is based on many potential value propositions. For one, wind conditions near major load centers are much stronger offshore than on land. These windy offshore areas are a relatively short interconnection distance from urban electric grids. Annual average wind speeds within 20 km of New York City and Boston, for example, are 9 m/s or greater at a 100-meter hub height – rivaling conditions at operating offshore wind plants in Europe. Land-based wind development in the eastern U.S., on the other hand, is limited by less windy sites requiring delivery through a significant distance of constrained transmission networks to reach lucrative coastal urban energy markets. These markets can more simply satisfy their hefty appetites for green energy by pursuing offshore wind power.
For another value proposition, the diurnal pattern of offshore wind speeds along the East Coast is starkly different from what happens inland (See Figure 1). In the marine environment, winds normally peak in the afternoon and evening hours; inland winds, on average, peak during the overnight hours and are relatively light in the afternoon. The significance of this contrast is that the offshore wind pattern more closely resembles that of electric demand. This stronger load coincidence has positive implications for how the output of offshore wind plants can be valued.
In a large portion of the eastern U.S., energy is obtained and sold through a market structure overseen by an independent system operator (ISO). Electricity purchases and sales are made according to how, where and when the electricity is supplied.
Known as locational marginal pricing (LMP), this pricing method incorporates three cost components: energy, congestion and transmission losses. The marginal cost of energy is set by the highest-priced unit required to support the load. The marginal cost of congestion is essentially a premium paid to use energy sources that avoid congestion areas and maintain system stability. The marginal cost of losses covers the price of the extra energy required due to transmission losses.
Here is a simple illustration of how LMP works: Within a given market area, prices will be the same if the lowest-price electricity can be delivered everywhere to satisfy all demand. When heavy use of the transmission system leads to congestion and prevents the lowest-price electricity from reaching all areas, more expensive and advantageously located generation is ordered to meet the demand. This action results in higher LMPs in those locations.
East Coast transmission markets where the LMP method is practiced include ISO New England, the New York ISO and PJM Interconnection. These markets span the coastal states of Maine to Virginia, where most early-stage offshore wind development is centered.
In these markets, LMP is driven by demand, which leads to higher prices during the day when the load is high. Pricing is also higher in urban areas. For example, during the day in New York State, prices can average 50% to 100% higher in the New York City-Long Island area compared to rural upstate regions. Overall, the annual average LMP value in these three markets generally falls in the range of $30/MWh to $80/MWh.
Another attribute of these markets is that, due to heightened air-conditioning loads, summer is the season of greatest electric demand. On the hottest days when electric demand peaks and the grid is taxed to its limits, prices can spike by a factor of 10 or more for stretches of hours.
On July 22, 2011, for example, the LMP in the New York ISO market exceeded $400/MWh for 11 straight daylight hours and spiked above $900/MWh for one hour. On that day, the temperature hit 104°F in Central Park. These sky-high prices play to the advantage of offshore wind.
The weather events responsible for peak electric load on the East Coast – typically a Bermuda High that delivers persistent hot, hazy and humid conditions – also enhance wind flows over the adjacent offshore waters. (Inland winds, meanwhile, are usually relatively light.) The offshore winds are enhanced by the large land-sea temperature differential. This phenomenon is generically called the “sea breeze effect” and is remarkably reliable. This indicates that the value of offshore wind generation can be much higher than that of land-based wind power and can earn a higher capacity credit as well.
Figure 2 illustrates hourly average power output (left axis) for a simulated 200 MW offshore wind plant located near Long Island compared to a same-sized plant located in upstate New York for the 2011-2012 annual periods. The average hourly LMP for the same years for the New York ISO are indicated by the top line (referenced to the right axis). The graph’s middle line shows how offshore plant output ramps up during the afternoon hours, while the inland project’s output (bottom line) is a virtually flat minimum. By comparing hour-to-hour plant output with the coincident LMP, the total spot market value of energy from an offshore project can be compared with an inland one. Research confirms that the inland plant’s annual production would have had a total market value of approximately $18.7 million, while the offshore plant realized about $49.1 million, an amount 2.6 times higher with the historic LMP values. Connection of offshore wind to urban nodes will slightly reduce the LMP values in the region, which will still represent a large increase in revenue potential over inland. In addition, the slight reduction in urban LMP values will benefit ratepayers, as the cost of energy is directly transferred to the consumer.
Using a similar exercise, it can be shown that offshore achieves a much higher capacity value (or credit) as well. The capacity value of a power plant is the amount of generation that can be relied upon to meet system loads according to certain standards. In the summer, the New York ISO determines capacity value as the average capacity factor between 2 p.m. and 6 p.m. from June through August. ISO New England uses a similar definition but extends the season through September. For the same 2011-2012 analysis period previously described, an offshore project near Long Island would achieve a capacity value of approximately 45% compared to 15% inland, according to the New York ISO approach.
An offshore project off the southern shore of Rhode Island would achieve a capacity value of 44% compared to 18% within interior New England, according to the ISO New England approach. These findings indicate that offshore wind energy may provide more value to energy markets in the eastern U.S. than generally realized. The better load coincidence quality of offshore wind can provide significantly more revenue potential than land-based wind, as well as much higher capacity value. Geographically, offshore wind has the added benefit of being on the desired side of transmission congestion. By delivering energy directly into urban grids, regional transmission congestion can be eased. By partially relieving congestion, offshore wind will benefit both developers and ratepayers. w
Industry At Large: Offshore Wind
The Value Proposition Of Load Coincidence And Offshore Wind
By Bruce Bailey & Whitney Wilson
Among offshore wind’s many attributes, none is more compelling than how it mirrors the demand profile for U.S. load centers.
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